Outlook Stable for Financial Infrastructure Companies in 2018

Tuesday, November 21, 2017
4:30PM/ Fitch RatingsFinancial market
infrastructure companies' (FMIs) are sufficiently well-positioned to manage
intensifying competition next year, according to Fitch Ratings' 2018 Outlook
report.Supporting the sector's stable outlook are FMIs' entrenched franchises, scale
and increasingly diversified business models, which will help offset
persistently lower trading volumes and increasing regulatory and infrastructure
costs. Fitch defines FMIs as including exchanges, central clearing houses
(CCPs) and collateral securities depositories (CSDs)."Intensifying competition and potential scale benefits are likely to lead
to further industry consolidation in 2018," said Evgeny Konovalov,
Director in Fitch's Non-Bank Financial Institutions group. "Many exchanges
are also seeking to expand their core franchises by adding related
services." For exchanges, those which are more vertically-integrated are better positioned
to weather competitive pressures and market fluctuations given the diversity of
their revenue bases and lower correlation between business lines. However,
increased merger and acquisition (M&A) activity would result in increased
leverage, followed by potential de-leveraging thereafter. For CCPs, competitive pressures may drive initial and variation margin
requirements lower, which would reduce CCPs' ability to manage losses from
counterparty defaults in the event of market stress. At the same time, recent
regulatory developments are likely to be moderately positive for CCPs, as the
requirement for central clearing of derivatives has brought significant
business volumes to the largest CCPs.More prudent regulations
and stress testing, albeit introducing additional regulatory compliance costs,
may promote more robust risk controls and temper risk appetites, in Fitch's
opinion."Fitch believes that increased alignment of interest between CCP shareholders
and market participants through increased skin in the game would benefit CCPs'
risk profiles going forward", said Konovalov.For CSDs, Fitch expects profitability to remain sound in 2018. "Supportive
fixed income markets and their prudent approach to ancillary business growth
will allow Europe-based international CSDs to absorb still-rising costs
relating to infrastructure investments like cyber risks and regulatory
changes," said Christian Kuendig, Senior Director in Fitch's Non-Bank Financial
Institutions group.Fitch also expects that CSDs' risk-weighted capital ratios will remain strong
in 2018. Ongoing capital generation and balance sheet optimization at
commercial banks will support moderately increasing settlement volumes and
growing assets under custody. European CSDs, for example, have started charging
for some institutional deposits in an effort to reduce their balance sheets.Related News

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